"Perhaps the smartest thing an ordinary investor can do is to engage in periodic rebalancing of a diversified portfolio."
Burton Malkiel, PhD, author A Random Walk Down Wall Street
The 7Twelve Investment Strategy
What is 7Twelve?
7Twelve is a blueprint to build a well-diversified investment strategy with a single investment. Unlike traditional two-asset 60-40 balanced, the 7Twelve uses multiple asset classes in an effort to enhance performance and/or reduce risk.
Our balanced strategy provides investors access to non-traditional assets such as real estate, commodities, and emerging markets.
Each investment asset adds an important dimension to the portfolio because of the low correlation and behavior between them.
The 7 of 7Twelve represents the suggested number of asset classes to include in your portfolio. The Twelve represents the 12 underlying investments.
Why Diversified?
Most investors are under-diversified. For example, they do not own commodities or real estate despite the fact that these two asset classes make up over 41% of all global investable assets. Holding these together with stocks, bonds, and cash in one inseparable portfolio helps make the world safe for non-traditional assets.
Additionally, Professors Brad M. Barber and Terrance Odean wrote, “Some investors fail to take advantage of the full benefits of diversification. Under-diversified investors might over-invest in company stock, local stocks, familiar stocks, and domestic companies. Doing so may make them feel safe, but it leaves them exposed to increased volatility in their investment returns.” Source: Handbook of the Economics of Finance, 2013.
The 7Twelve strategy seeks to provide breadth across seven core asset classes, and diversification depth within each separate fund in the portfolio.
Why 7 Asset Classes?
The 7Twelve strategy uses multiple asset classes to seek to enhance performance and reduce risk.
The traditional equation of two asset classes – U.S. stocks and U.S. bonds – may not add up to greater returns and less volatility.
The long-term success of the 7Twelve strategy may be the result of genuine diversification across these seven core asset classes.
So: 7Twelve is a diversification tool for the under-diversified.
The 12 Underlying Investments
The 7Twelve strategy uses multiple asset classes: equities, fixed-income, traditional assets, and non-traditional assets. The strategy invests approximately 8.3% in each asset class.
There are two ways to invest: predict the market,
or equally-weight. Equal-weighting is the reality
that we cannot consistently pick winners.
Why Equally Weight?
If you could consistently pick winners it would be settled science that market-cap weighted portfolios outperform equally-weighted portfolios.
Equal-weighting puts one important decision for you and your clients on auto-pilot and frees up your time for the decisions over which you actually have control.
An equally-weighted portfolio may be effective in today’s turbulent times. “Equal weighting’s prospects improve when forecasting is difficult, when there are lots of investment choices and when the historical learning sample is limited. That more or less describes the profile of the capital markets.”
Building a Better Balanced Fund
We believe the balanced fund was a wonderful invention in 1929 by Walter L. Morgan, a Philadelphia businessman. It was roughly 60% US stocks and 40% US bonds. However it missed some important elements that may respond well in a variety of markets: non-US stocks, non-US bonds, Real Estate, Commodities, and Cash. Including these in a portfolio may either improve returns or lower risk.
Why Indexed based?
At the 15-year horizon in both asset classes (equity and fixed income), there were no categories in which the majority of active managers outperformed.
Source: SPIVA U.S. Year-End 2023 - S&P Global
The information contained herein is for educational purposes only and is not to be considered investment advice nor a recommendation of any fund, product or investment. Information is obtained from third-party sources which are believed to be reliable, but have not been independently verified by 7Twelve. “7Twelve” is a trademark. 7Twelve™, 7Twelve Advisors, LLC, and all strategies, models, adaptations, and products created from said intellectual property are the sole ownership of Craig L. Israelsen, PhD, and/or 7Twelve Advisors, LLC.
The value of small or medium capitalization company stocks may be subject to more abrupt or erratic market movements than those of larger, established companies or the market averages in general. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. The value of the strategy’s investments in bonds and other fixed income securities will fluctuate with changes in interest rates. Security issuers might not make payments on debt securities held by the strategy, resulting in losses. Foreign investing involves risks not typically associated with U.S. investments, including adverse fluctuations in foreign currency values, adverse political, social and economic developments, less liquidity, greater volatility, less developed or less efficient trading markets, political instability and differing auditing and legal standards. Countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries, and securities markets that trade a small number of issues. Investing in the commodities markets through commodity-linked ETFs will subject the strategy to potentially greater volatility than traditional securities. Commodity prices are influenced by unfavorable weather, animal and plant disease, geologic and environmental factors as well as changes in government regulation such as tariffs, embargoes or production restrictions. The strategy’s exposure to companies primarily engaged in the natural resource markets may subject the strategy to greater volatility than the securities market as a whole.
Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable. The cost of investing in the strategy will be higher than the cost of investing directly in ETFs and may be higher than other mutual funds that invest directly in stocks and bonds. “The 7Twelve Strategy” is back-tested by equal-weighting Twelve underlying indexes, funds, and ETFs which represent the asset classes. In as much as TIPS were first traded as a security in 1998 (first full year), the only way one can model the strategy longer term (back to 1970) is to compare with the "7 Asset" strategy which is composed of US and non US Bonds and Stocks, Real Estate (REITS), Commodities, and Cash. There has been a high correlation between the returns of the 7Twelve strategy and the 7 asset strategy, but there is no guarantee that this will continue. Indexes are not investable. No fund or securities product returns are mentioned or implied. Past performance is no guarantee of future returns.